a) What is „Independence of Mind‟ and „Independence in Appearance‟?
b) You are the statutory auditor of PQR Ltd., while carrying out the audit you found existence of certain threats to objectivity at significant level. What is your duty in such situation? Give the examples of safeguards you will apply in such situation?
c) Explain the provision relating to ‘Conflicts of Interest’ with reference to Part B of Code of Ethics.
a) In case of audit engagements, it is in the public interest and, therefore, required section 290 0f Code of ethics, that members of audit teams, firms and network firms shall be independent of audit clients.
Independence of Mind
Independence is a state of mind and personal character and an enlightened view of the professional duties involved. The state of mind that permits the expression of a conclusion without being affected influences that compromise professional judgment, thereallowing an individual to act with integrity and exercise objectivity and professional skepticism.
Independence in Appearance
Independence of auditor must not only exist in fact, but should also appear to exist to all reasonable persons. The avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude, weighing all the specific facts and circumstances, that a firm‟s, or a member of the audit team‟s, integrity, objectivity or professional skepticism has been compromised.
As per Section 280 (4) of ICAN Code of Ethics, I should evaluate the significance of such threats and should apply safeguards when necessary to eliminate them or reduce them to an acceptable level. The safeguards that should be applied are:
i. Withdrawing from the engagement team;
ii. Supervisory procedures;
iii. Terminating the financial or business relationship giving rise to the threat;
iv. Discussing the issue with higher levels of management within the firm;
v. Discussing the issue with those charged with governance of the client.
If safeguards cannot eliminate or reduce the threat to an acceptable level, I should decline or terminate the audit engagement of PQR Ltd.
Section 210 of Code of Ethics contains the provision relating to Conflict of Interest. A professional accountant in public practice may be faced with a conflict of interest when performing a professional
service. A conflict of interest creates a threat to objectivity and may create threats to other fundamental principles.
Such threats may be created when:
• The professional accountant provides a professional service related to a particular matter for two or more clients whose interests with respect to that matter are in conflict or
• The interests of the professional accountant with respect to a particular matter and the interests of the client for whom the professional accountant provides a professional service related to that matter are in conflict.
A professional accountant shall not allow a conflict of interest to compromise professional or business judgement. The professional accountant in public practice shall apply safeguards, when necessary, to eliminate the threats to compliance or reduce them to acceptable level.